Startups and the art of the “one thing”

The one thing they don’t believe is the one thing that will make or break your startup

If you don’t know why this photo of curly is here, scroll down and watch the video…

A story

I was recently working with one of my portfolio companies to introduce some potential follow-on investors and help them navigate that process. The company, which I’m not going to name in this post, is building a pretty critical piece of IT infrastructure for a very large but difficult to penetrate segment of the economy. The investment thesis has two central components. The first is that this piece of software will unlock a massive logjam of pent up demand for IoT deployment. The second is that this particular startup will be able to sell its SaaS infrastructure platform (1) rapidly (2) to multiple customers (3) without writing any custom code and (4) that, over time, customers will pay in the low- to mid-six figures for the technology.

As an early-stage investor, I’ve spent a ton of time with the CEO understanding the market, the technology/product, existing customer relationships, and the opportunity. There’s a lot we don’t know, but a lot we do. And then there is that one thing. Let me explain.

We pretty much know that the market opportunity (the first part of the thesis) is real: our customers are very consistent about that and there is plenty of other market signal here. The second part of the thesis is a bit more tricky. We know that the company can sell pretty rapidly. They have about eight paying customers and/or signed paid pilots in three different countries, and some of those customers are important reference customers within this industry. They did that without writing any custom code, without raising any real venture money, and without any sales people (the CEO’s deep background in enterprise software product management and sales helped a lot here). What we don’t know yet — what we can’t prove — is that the price point will be high enough to build a large business. That’s the one thing, however, that is make-or-break for this company. And it’s both the one thing we can’t yet prove and the one thing that the best VCs struggle to believe. In the words of one VC, “show me one customer paying you $250K, and I’m in.” More on this in a moment, but let’s talk about the “one thing” and what it means.

Defining the one thing

For an early-stage startup CEO, the one thing is the single central proof point of the round you are raising. It is something about which you do not have sufficient evidence to prove conclusively, but it is something that when proven will sufficiently derisk the company to make the next financing round much easier. In essence, the one thing is the thesis of the round you are in. It’s the thing you are betting the company on.

From an early-stage investor’s point of view (and for a founder), the one thing helps define a healthy early-stage round for three reasons

  • Risk management. There isn’t always one thing. Sometimes there are seven things. The truth, however, is that “one thing” is an acceptable level of early-stage risk. “Seven things” is probably not. If the startup needs to prove multiple things at once (we can hire top talent, we can build the tech, we can define the right product, our market exists, we can get to customers, we can charge through the roof, we can scale sales…) the ambition level on the round itself is quite possibly out of whack.
  • Alignment. When investors and founders are agreed about the one thing, it creates alignment from the get-go. It probably means everyone (founders and VC alike) have done their diligence properly and see the world in a similar way. And it probably means that the risks inherent in focussing the company’s efforts on proving that one thing will be both understood and tolerated by everyone involved.
  • A north star. Perhaps most importantly, defining that one thing helps create a north star for the company’s management during the time it takes to get to the proof point. For example, if you are trying to prove a price point, the way you prioritize features and engage with customers may be very different than if you are trying to prove the existence of a market in the first place.

The most important way to understand the “one thing” is through the eyes of the next round investor. For something to truly qualify as your “one thing” for a given round, two things must be true:

  1. The right (i.e. smart) next round investors (the ones you actually want) must not believe it today. If they did believe it or could believe it, you should be already raising that round from them today and working on something else…
  2. When you can prove it, the right (i.e. smart) next round investors (the ones you actually want) will invest. If you can prove your one thing and they still won’t invest, I’ve got some bad news. That thing you’ve been working so hard to prove, wasn’t the one thing. It might have been one of several, or it might have just been a waste of energy. But it wasn’t the one thing. It should go without saying that table stakes (“the CEO can run a company” or “the VP Engineering can design software architecture”) are never the one thing.

An important corollary of the one thing approach is that lack of belief by next-round investors is a critical driver of early-stage venture returns. I’ve lived this reality multiple times, including with SiSense (“business intelligence is a four letter word, all enterprise BI projects fail”), JFrog (“there is no money in development tooling because they have no budgets…”), and many other versions of (“that’s not going to work because _____”).

To be clear, there is a massive difference between “that’s not going to work” and “that’s not going to work because _______.” The first is just negativity. The second, if spoken by someone wise and experienced enough, can help you define your one thing and start the process of systematically proving them wrong.

The one thing approach leads to a difficult, but often true, place: the one thing they don’t believe — the one thing they are telling you is impossible — is exactly the thing that (if they are wrong) is going to drive the value. That one thing they don’t believe is the investment thesis. The one thing is the main driver of the difference in valuation between the current round and the next one.

What to do if you have more than one thing? The “one thing” scenario I’m describing is a sort of ideal case that — in my experience — helps define a successful early-stage round. But in many cases, a founder will rightly conclude that there are two, three, or many more things he or she needs to prove to get to the desired next round of financing. When that is the case, it typically means that the next round (and the current round) are probably poorly defined. Maybe it means the “seed round” you are trying to raise should really be much larger, or — conversely — that it should really be a smaller “friends and family round.” Maybe it means there are some things you are just going to need to do without financing (bootstrapped) before a round will make sense. And maybe it means that the next round is not going to be that $10M round led by the world’s greatest Series A investor, but really should be a $2M round led by the world’s greatest seed investor.

And now, back to our story…

As discussed above, the one thing that the specific company mentioned above needs to prove is that its price point is high enough to define a large and sustainable market. Leading VCs that can lead the next round don’t believe this for a number of really good reasons. I do believe this — or at least, I believe that this is absolutely an experiment worth running because if we can prove it the next round will be much easier. I’ve gotten really close to the company — close enough to understand how the pilots are structured and how they are priced. There are three things that make me comfortable in this specific case:

  • First, the CEO (and the rest of the company) is focused on this goal.
  • Second, the CEO has experience selling software at exactly this price level.
  • Third, and most important perhaps, the existing pilot agreements — while small — already have a pricing plan in place that sets the stage for them to scale up to a higher price point.

For these reasons, I’m very comfortable getting involved at this point. The company already has tangible proof points on all major elements of the thesis — except one. And that one thing will make all the difference. Or not. We’ll see.

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Curly says find your one thing.
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